(MENAFN– Gulf Times) Lebanon is cutting food subsidies and will gradually increase gasoline prices to save dwindling foreign exchange reserves, the finance minister said.
The central bank still has $ 16 billion in foreign exchange reserves, of which only $ 1 to $ 1.5 billion can be used to fund subsidies, enough for two to three months, Ghazi Wazni said in an interview. The reserves have halved from around $ 30 billion a year ago.
“Lebanon can no longer continue at the same rate of subsidies,” said Wazni, without giving a timeframe for the changes. “That costs $ 500 million a month, $ 6 billion a year. Because of this, the government has decided to streamline subsidies and reduce some items.
Wazni’s comments come amid angry protests sparked by a sudden collapse in the Lebanese currency. The pound plunged below 13,000 a dollar on the black market on Monday and lost more than 20% in two weeks. Since the anti-government protests in October 2019, the currency has lost nearly 90% of its value, pushing millions into poverty. The rate of inflation was 84% last year, with food inflation hitting 402% annually in December.
The central bank has stabilized the prices of wheat, medicines and fuel by making hard currency available to importers at the largely defunct official rate of 1,507 per dollar. Importers of 300 staple food and household products are also granted a preferential rate that allows them to buy dollars at £ 3,900 each. Other goods are financed at higher costs in a burgeoning black market.
The government will remove certain products, including cashew nuts and some branded coffees, from the subsidized list, in part because they were smuggled abroad for profit, Wazni said. It also plans to gradually increase prices at gas stations over the coming months, cutting gasoline subsidies from 90% to 85%.
Subsidies for wheat, medicines and fuel for power generation will remain in place for the time being, Wazni said.
“It was decided to reduce the subsidy for the food basket,” he said. “The decision that has to be made in the coming weeks is the gasoline. Last month, during the lockdown, we had the same consumption, so we think something is wrong.
Wazni conceded that the measures would boost the inflation forecast to 77% this year before subsidies are reduced. To help poorer people, Lebanon will introduce cash transfers via prepaid cards as part of a program recently approved by Parliament. The government pays families in need up to £ 1 million a month and has also secured a US $ 246 million World Bank loan to help 786,000 of the poorest people.
Wazni said the government still plans to devalue the currency as part of a move to a flexible exchange rate, but would not take that move without an economic reform program and support from the International Monetary Fund to restore confidence and anchor the pound.
“We’re going to get a flexible exchange rate, but we need an IMF program,” he said.
Since the government resigned in August after a devastating explosion in the port of Beirut, arguing politicians have not agreed on a new cabinet line-up. The caretaker’s cabinet cannot negotiate with the IMF, which is now essential to unlock other aid.
Lebanon defaulted on its $ 30 billion international debt a year ago. With no reforms or payment plans agreed since then, it cannot borrow or attract investors while the pandemic and banking crisis hit businesses. It was therefore no surprise that the pound had weakened, according to Wazni.
“The situation is: no dollar inflows, less confidence and a political dead end, which means uncertainty because you are afraid of the future as reserves are falling,” he said. ‘Financial, economic and political factors play a role, as do circumstances that led to the rapid deterioration in just a few days.
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